Variable payments for asset purchases and payments made by an operator to a grantor in a service concession arrangement (Agenda Papers 2A, 2B and 2C)

Recap

The Interpretations Committee has been considering the accounting requirements related to variable payments for asset purchases—generally referred to as contingent consideration. 

When an acquirer agrees to pay additional consideration for the acquisition of assets acquired in a business combination if particular circumstances eventuate, IFRS 3 Business Combinations requires the entity to estimate the fair value of the contingent consideration at the date of acquisition and any difference between the amount paid and the initial estimate are recognised in profit or loss.

In contrast, the forthcoming leases Standard links the measurement of the leased asset to the consideration paid.  On initial recognition the leases Standard limits contingent consideration to variable payments linked to an index or rate.  Any obligation to make additional payments that have not been recognised initially are added to the leased asset and to the lease obligation, when the obligation arises. 

There are no specific requirements in IFRS that set out the accounting for variable payments related to an asset purchase.  In its September 2015 meeting, the Interpretations Committee asked the staff to analyse the conceptual arguments underlying the principles of business combinations and leasing and assess how they might be applied when accounting for variable payments for asset purchases.

Asset acquisitions

Staff recommendations

Initial measurement:  The staff are of the opinion that, despite the associated costs of doing so, principles consistent with those of business combinations should be applied when accounting for variable payments, because they provide a conceptually robust conclusion that leads to a more faithful representation of the economic consideration transferred. In addition, the staff considered and presented the advantages and disadvantages of instead applying leasing principles for the Committee’s consideration.

Subsequent measurement:  When an adjustment to a liability is interest expense, it would be recognised in profit or loss.   Any other adjustments to the financial liability that result from a revision of estimates of payments would be an adjustment to the cost of the related asset.  

The Committee was asked whether it agrees with the staff’s resulting proposals relating to the initial recognition and measurement (see Agenda Paper 2A) and the subsequent recognition and measurement (see Agenda Paper 2B) of variable payments made for the purchase of property, plant and equipment and intangible assets outside of a business combination.

Committee discussion and decision

After a lively discussion, the Chair identified and confirmed with the Committee that no consensus had been or could be reached relating to the issues under discussion. The issue under consideration is too big and too fundamental to be addressed by the Committee and the Chair requested the staff to prepare an Agenda Decision for review that reflected this.

Many different aspects were discussed by the Committee. The primary issue is whether or not the variable payments would or should be recognised as a liability, in particular a financial liability. Some Committee members were of the opinion that they should while others did not share this view, but there was agreement that consideration of this issue was particularly complex given the inconsistent treatment within numerous Standards. Furthermore, many members raised concerns about measurement and uncertainty of any liability that was recognised.

In addition, there was no consensus, irrespective of whether a liability could be recognised or not, regarding which accounting principles (business combinations or lease accounting) should be applied.

Service concession arrangements

Staff recommendations

The staff, per the Committee’s request, also considered whether service concession arrangements represent a distinct and specific type of transaction that can be separately analysed. In addition, the staff have considered whether a solution for accounting for payments to be made by an operator to a grantor under such an arrangement could be developed without addressing the broader issues of variable payments for asset purchases (see Agenda Paper 2C).

The staff concluded that the intangible asset arising under a service concession arrangement is not unique and therefore, the Committee should resolve the broader issue of accounting for variable payments for asset purchases. If consensus cannot be reached, the staff think that a solution, with similar principles applied to accounting for a lease arrangement, can be developed within the confines of IFRIC 12.

The Committee was asked whether consensus on the appropriate consensus accounting for variable payments for asset purchases can be reached and, if not, should work on a solution within the confines of IFRIC 12 be developed.

Committee discussion and decision

Similarly to the previous issue discussed, no consensus could be reached by the Committee relating to the accounting for variable payments or whether a solution within the confines of IFRIC 12 should be developed. Again, the Chair requested that the staff prepare an Agenda Decision to reflect this.

Some Committee members questioned whether the contracts in question are actually different to other contracts and whether they should be treated differently. A number of members were comfortable that an intangible asset would arise, but that such an intangible was dissimilar to those considered when IAS 38 was drafted.  Therefore, a potential scope amendment to IAS 38 would be required should such a thought process be progressed and investigated further. Others questioned whether an intangible asset did in fact arise and stated that an adjustment to revenue recognised may be a better solution.

Some members were in favour of applying the principles of lease accounting should a solution be sought within IFRIC 12, but one member raised that IFRIC 12 as currently written clearly stated that rights to lessees are different to those of operators in a service concession arrangements, so leasing principles should not be considered.

Derecognition of modified financial assets

In this session, the staff will ask the IFRS Interpretations Committee whether they would like to progress with a potential project to clarify IFRS 9 and IAS 39. The project would relate to derecognition requirements on modifications or exchanges of financial assets. Staff had performed an initial analysis on the general issues with this topic. The results of the analysis are presented in the agenda paper.

Staff recommendation

The staff concluded that it would be difficult to develop a narrow-scope project, as there are potential implications for the derecognition of transferred financial assets, linkage of transactions and the derecognition of modified financial liabilities. Moreover, such a project would require a significant amount of time and resources. The staff also noted that there was limited evidence of a pressing need for new guidance.

Hence, the staff recommends not to pursue the issue at this time. Individual members of the IASB supported this recommendation in an informal sounding.

Committee discussion and decision

Some Committee members disagreed with the staff recommendation and believed the issue could be narrowed down sufficiently to be addressed by the Interpretations Committee. They acknowledged that the process would not be simple but in their view, it would be feasible. Some expressed disagreement with the statement that there was limited evidence of a pressing need as they had been observing significant diversity in practice. The Technical Director acknowledged this but said that the issue could not be fixed quickly as the existing guidance in IAS 39 and IFRS 9 would have to be amended. Several Committee members conceded that further discussion of the issue would be futile as long as the IASB remained reluctant to address it.

An observing IASB member added that developing guidance would be very difficult as the derecognition requirements for liabilities could not simply be mirrored for the asset side. This was mainly owing to the fact that financial assets (unlike financial liabilities) are subject to impairment and the impairment guidance would interact with any guidance on modifications.

The Chairman called a vote on the issuance of an agenda decision. 9 of the 14 Committee members voted in favour of a rejection notice. The Chairman concluded that this was a sufficient majority.

At its October 2015 meeting, the IASB tentatively decided to propose amendments to IFRS 3 Business Combinations related to the definition of a business.  IFRS 3 and the equivalent FASB requirements are aligned; the two boards having developed the requirements in a joint project.  The amendments being proposed will be the same as those being proposed by the FASB.

It was observed in that meeting that the IFRS Interpretations Committee had also discussed some issues relating to the definition of a business.  The IASB asked that the proposed amendments to IFRS 3 be shared with the Interpretations Committee.

The paper for this session set out the proposed amendments to IFRS 3, along with the staff’s analysis of how the amendments would address the issues that had been raised to the Interpretations Committee about the definition of a business. 

The staff concluded that the proposed amendments would help solve the issues that had been raised to the Interpretations Committee.  The Interpretations Committee were asked whether they agreed with this conclusion and whether they had any comments on the proposed amendments to IFRS 3. 

Interpretations Committee discussion

The general consensus of the Committee members was that overall; the proposals would be useful improvements to IFRS 3 and would address the issues that had arisen in practice.  It was acknowledged that this would always be an area of judgement, but that the proposals provided a helpful framework for applying that judgement.

The Committee members made suggestions for improvements to some of the proposals, with Proposal 3 “to not consider a set a business if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets” attracting the greatest discussion.

With respect to Proposal 3, there were concerns expressed that this could be tricky to apply in practice.  One Committee member highlighted the fact that situations might arise where the bulk of the fair value was concentrated in assets that were not part of the primary focus of the business, for example, in a start-up biotech company that happened to own a building and had in-process R&D (“IPR&D”), the bulk of the fair value could be in the building rather than in the IPR&D, in which case, an entity might come to a different conclusion under this test.  Another Committee member observed that it appeared that if an entity was going to determine whether the fair value of the assets acquired was concentrated in a single asset by comparing it to the fair value of the gross assets, the entity would be required to do a whole purchase price allocation to get there, which seemed to defeat the purpose of then saying it was an asset acquisition.  The Committee member added that if the other proposals were followed, this step would not be necessary as an entity would get to the answer anyway.  Several Committee members highlighted unit of account issues that could arise under this proposal.  It was specifically noted that under IFRS today, investment property was considered to be a single unit of account (including all in-place leases), and questioned whether under this proposal entities would be required to separate out the value of property and the value of the leases. 

With respect to Proposal 1, it was observed that what was considered a substantive process would create some judgement issues, and a Committee member suggested that in addition to the proposed examples, some further guidance on this could be helpful. Another Committee member noted that it was not clear whether, if an entity (i.e. an exploration entity) acquired inputs (i.e. tenements) and a workforce (undertaking drilling and exploration activities) that were capable of producing something on the path to the ultimate output, but not the ultimate output; that would be a business or not.

With respect to Proposal 4 “revising the definition of outputs to focus on goods and services provided to customers”; a Committee member questioned whether a customer could be internal.  It was noted that this question had arisen in the joint IASB FASB meeting, and confirmed that a customer could be internal.

In general, it was observed that one of the consequences of the amendments was that there would likely be more transactions accounted for as asset acquisitions, and one Committee member noted that the tension between what securities commissions regarded as business acquisitions versus the answer one would arrive at under IFRS, would be exacerbated.

With respect to the examples, one Committee member noted that it was helpful to have examples that fell on both sides of the line, and while this was an area where judgement was needed, the answers in the examples would be where most entities should get to, which should result in more harmonised application of the guidance by both US and IFRS preparers.  Another Committee member suggested that it would be helpful to include examples from the upstream extractive and financial services industries because there were a number of issues in practice in this area coming from these industries.

No decisions were made at this meeting.  The Interpretations Committee’s comments will be reported back to the IASB at its December 2015 meeting.

Background — tentative agenda decision

The IFRS Interpretations Committee has been considering whether a purchaser should accrete interest on long-term prepayments for the purchase of inventory. The original request arose in relation to long-term supply contracts for raw materials, for which the purchaser agrees to make prepayments to the supplier. Recognising interest income would increase the cost of inventories and, ultimately, the cost of sales.

In July 2015 the Interpretations Committee concluded that the issue should not be added to the agenda. It did so on the grounds that its outreach gleaned very little information about the extent of the problem or whether there was diversity in practice. The Interpretations Committee issued a tentative agenda decision which stated that if a long-term supply contract contains a significant financing component, that financing component should be recognised separately.

Comment letter analysis

The purpose of this session is to discuss the comments letters received. The Interpretations Committee received three comment letters.  Two of the submitters urged the Interpretations Committee to add this issue to its agenda, mainly to address an uncertainty. 

The staff recommendation is to finalise the agenda decision on the grounds that the comment letters did not provide additional information and that the original conclusion of the Interpretations Committee remains valid.  

Discussion

The majority of the Interpretation Committee members approved the staff recommendation. During the discussion it was agreed to amend the wording of the agenda decision by removing a reference to raw materials so as to make the wording more generic to long term supply contracts. The support was based on the fact that those transactions depend on specific facts and circumstances which made it difficult to specify and analyse.

Some Interpretation Committee members raised a concern that the agenda decision implied that a long term supply contract always includes a financing component. Other concerns raised related to the fact that the identification of financing components should be explored more fully, and disagreement with making a reference to IFRS 15 in the agenda decision, because the transaction under analysis was based on the point of view of the purchaser and not the seller.

New issue – Accounting for recoverable cash payments

The Interpretations Committee received a request to clarify whether cash payments made by a government to assist an entity finance a research and development project should be accounted for as a liability (i.e. a forgivable loan as defined in IAS 20) or as revenue (i.e. a government grant as defined in IAS 20) when received.  In the scenario presented, the cash payments were repayable to the government if the entity decided to exploit and commercialise the results of the research phase of the R&D project.  The submitter cited current divergence in practice.

Staff recommendation

Having performed analysis and outreach on the issue, the staff considered there was sufficient guidance in IAS 20 and other Standards to assist an entity in determining the appropriate treatment for the cash payments and that diversity in practice was limited.  The staff highlighted that the appropriate accounting would depend on the specific terms and conditions of the cash payment received, and included in the paper a list of factors that an entity should consider in determining the appropriate accounting for the cash payment.  These factors were also set out in the tentative agenda decision and related to (a) whether the assistance gave the government ownership in the entity; and, if it did not, whether it was a loan at favourable terms.  The staff concluded that for the scenario considered the payment was likely to be a forgivable loan in the first instance.

The staff recommended that the issue was not taken onto the Interpretations Committee’s agenda and proposed wording for a tentative agenda decision.  The Interpretations Committee was asked whether they agreed with the conclusion of the staff, and with the wording in the tentative agenda decision.

Interpretations Committee discussion and decision

There was general agreement amongst the Committee members on the proposed direction the IASB staff had taken on this issue, with observations made that the facts and circumstances and terms and conditions of these transactions vary greatly; judgement is required in determining the appropriate accounting treatment; and that predominant practice is to account for them as forgivable loans.

Commenting on the staff view in paragraph 45 of the agenda paper that “this loan should be accounted for under IFRS 9 until there is reasonable assurance that the R&D project will not be successful and the entity will abandon the project and meet the terms for forgiveness for all or a portion of the loan”, several Committee members questioned what “reasonable assurance” meant and at what stage this would be achieved.  It was observed that determining whether there was “reasonable assurance” would be a matter of judgement, and a Committee member suggested including this point in the agenda decision to make it clear that this was not at a specific point in any arrangement.  The ESMA representative present supported this edit, adding that this was a key element in the analysis and therefore, worth mentioning in the agenda decision.  The point was also raised that if a loan was being accounted for under IFRS 9, one would need to meet the derecognition criteria in IFRS 9 to move away from accounting for the liability under IFRS 9.

Several Committee members observed that the agenda decision picked up some peripheral issues around government participation and below-market rate loans, and noted that these were considerations that would need to be applied in any circumstances, and did not address the question actually asked.  They expressed concern that inclusion of these issues could result in more questions rather than contributing to the solution, and suggested that these items were removed and that the agenda decision focused solely on whether there was a forgivable loan or not.

The Interpretations Committee tentatively agreed to move forward with the agenda decision, subject to the edits being made as discussed above.

New issue — Accounting for income tax consequences of interest payments on, and issuing costs of, financial instruments that are classified as equity

The Interpretations Committee has received a request to clarify the accounting for the income tax consequences income tax consequences of “interest payments” to holders of equity instruments, and the costs of issuing such instruments. 

In general, IAS 12 requires that the tax consequences follow the primary transaction or event. Accordingly, if an item is recognised directly in equity the deferred tax that relates to that item is also recognised directly in equity. However, IAS 12.52B states that the income tax consequences of dividends are recognised in profit or loss, unless the dividends relates to transactions recognised outside of profit or loss or a business combination.

The submitter is seeking clarity as to whether instruments such as perpetual bonds that provide interest payments at the discretion of the entity, which are deductible for tax purposes by the entity, should be recognised (and therefore presented) in profit or loss or directly in equity. They are also seeking the same clarity for issue costs of this type of instrument.

Staff recommendation

The staff recommendation to the Committee is that the issue not be added to its agenda. The staff believe that a conclusion can be reached drawing on existing principles in IAS 12.

Most of the staff analysis relates to the interest payments. The tax accounting for the costs of issuing the instrument seem less contentious, with the recommendation being that the tax consequences be recognised directly in equity “consistently with the presentation of the transactions that create those income tax consequences” (Staff paper, paragraph 48(b)). 

On the interest payments, the staff argue that whereas dividends are “generally distributed from retained earnings” interest payments on equity instruments “are not associated with anything other than the interest payments themselves, and therefore, the income tax consequences are not linked to past transactions or events” (sic) (Staff paper, paragraph 31). By implication, the staff have concluded that these discretionary interest payments are not distributions. (Staff paper, paragraph 29). On this basis the staff conclude that that IAS 12.52B would not apply to these interest payments and that consequently, the related income tax consequences should be presented directly in equity.

Committee discussion and decision

The Committee believe that there is a disconnect in IAS 12 between the requirement to have the deferred tax consequences follow the accounting for the related item and the exception in IAS 12.52B for distributions.  Some members of the Committee disagreed with the staff analysis that this was not a distribution and also highlighted that in some jurisdictions dividends are the subject of a solvency test rather than a reference to retained earnings. 

Ultimately, the conflict can only be resolved through an interpretation of or a narrow scope amendment to IAS 12.  The issue will be brought back when the Committee next has a face-to-face meeting, in March 2016. 

New issue — Recoverable amount and carrying amount of a cash-generating unit (CGU)

The Interpretations Committee received a request to clarify the application of paragraph 78 of IAS 36, which sets out the requirements when it is necessary to consider recognised liabilities to determine the recoverable amount of a CGU. 

The submitter stated that the approach in paragraph 78 for making a CGU’s carrying amount comparable with its recoverable amount (by deducting the carrying amount of the liability from both the CGU’s carrying amount and from its value in use (VIU)), produced a null result, and believed that this could not be the intention of the Standard.  The submitter also asserted that it did not seem to be appropriate to deduct the carrying amount of the liability from the VIU of the CGU because the approach used to measure the present value of a liability was different from the approach used to measure the present value of a CGU’s VIU.  The submitter proposed an alternative approach.

Staff recommendation

The staff disagreed with the submitter, because they believed that the approach in paragraph 78 was intentional and was the consequence of applying IAS 36’s approach for assessing impairment.  The staff observed that when a CGU’s fair value less costs of disposal (FVLCD) considered a recognised liability, paragraph 78 required adjusting both the CGU’s carrying amount and its VIU by the carrying amount of the liability in order to make those measures comparable with the FVLCD.  However, when an entity used the VIU as its recoverable amount, the entity did not need to make an adjustment to the CGU’s carrying amount and to its VIU similar to the one required by paragraph 78, because the carrying amount of the CGU would already be comparable to the VIU of the CGU.  The staff further noted that the approach in paragraph 78 provided a relatively straightforward and cost-effective method to perform a meaningful comparison of the measures involved in impairment testing.

The staff therefore recommended that the issue was not taken onto the Interpretations Committee’s agenda and proposed wording for a tentative agenda decision.  The Interpretations Committee was asked whether they agreed with the conclusion of the staff, and with the wording in the tentative agenda decision.

Interpretations Committee discussion and decision

There was general agreement amongst the Committee members who spoke that the application of paragraph 78 was found to be difficult in practice, and that differing views existed as to how it should be applied and what should be done to address the mismatch.  It was observed that although this was an issue that may not affect all industries, for the industries it did affect (i.e. the extractive industries where decommissioning liabilities are significant) it was a significant issue.

The IASB Technical Manager noted that the feedback received from accounting firms on the outreach performed indicated that they had encountered diversity in practice regarding not only application of paragraph 78, but also other aspects of IAS 36; many of which were related to how and whether to include deferred taxes when applying the guidance in paragraph 78.  The feedback also indicated that amending paragraph 78 would not resolve all issues, and that the Interpretations Committee should refer the issue to the IASB who should carry out a broader review of IAS 36. Several Committee members agreed that this was something that should be dealt with by the IASB rather than the Interpretations Committee.

One Committee member observed that there were situations in practice where the liability determined in accordance with IAS 37 was deducted from the carrying value of the CGU and the recoverable amount was then determined by including the cash outflows in the estimate of cash flows, which was then discounted by a different discount rate, and noted that accordingly, the impact of the mismatch could be significant.  The Committee member further noted that this issue also arose with deferred taxes in situations where the entity could not sell the assets without the associated tax obligation.  The Committee member did not believe this was an issue that could be dealt with simply through an agenda decision.

Another Committee member suggested that if the IASB did carry out a broader project on IAS 36, the issue around deferred taxes and the gross up of goodwill and intangible assets acquired in a business combination should be included in the scope of the project.

Twelve of the fourteen Committee members voted to move forward with the proposed agenda decision.  One of the Committee members who objected had highlighted earlier in the discussion the fact that the impact of the mismatch could be significant, and suggested adding wording to the agenda decision to emphasise the need for people to ensure they were comparing apples with apples when performing an impairment test.

Background

The Interpretations Committee decided to prepare a comment letter in response to the IASB’s 2015 Agenda Consultation Request for Views.  The Interpretations Committee discussed its initial views in September 2015 and the staff informally surveyed members of the Committee.  The staff was asked to prepare a draft letter reflecting that input.   

Analysis and draft comment letter

The purpose of this session was to discuss the wording of the comment letter prepared by the staff and to decide whether it should be sent to the IASB. 

The agenda paper listed those topics that the Committee members thought should be a priority for the IASB.  Topics listed as priority were: (i) financial instruments with characteristics of equity; (ii) equity method; and (iii) non-current assets held for sale and discontinued operations. Other topics listed with less priority are (i) business combinations under common control; (ii) disclosures; (iii) discount rates; (iv) employee benefits; and (v) income taxes.

Appendix A of the staff paper included a draft of the comment letter.

Discussion

The Interpretation Committee agreed with the staff recommendation.

During the discussion it was suggested, and supported, that the letter should explain that the priorities suggested were in the context of the Interpretation Committee activity, rather than reflecting the personal views of the members.  The priorities therefore reflect those matters for which the Committee had identified that there were more than isolated issues, which suggested that a more substantial response than piece-meal interpretations was required.  It was also agreed to keep the three main topics listed as a priority and as further topics to keep (i) discount rates; (ii) employee benefits and (iii) income taxes.

Business combination under common control and disclosure would be removed based on the fact that the Committee had not received requests recently on those topics.

New item — Offsetting in respect of certain cash pooling arrangements

The IFRS Interpretations Committee has received a request to clarify whether certain cash pooling arrangements between subsidiaries in a group would meet the requirements for offsetting in IAS 32.

The submitter described a notional pooling arrangement where the interest is calculated on the net balance of all the separate bank accounts and where there are regular transfers of balances into a single netting account (not at the reporting date). Such transfers would not be required under the contractual terms of the arrangements and the bank and the group would have the necessary legally enforceable right to set these balances off under IAS 32 at the reporting date.

The submitter asked whether the described transfers during the period demonstrate an intention to settle the period-end balances on a net basis for the purpose of meeting the offsetting requirement in IAS 32.

Staff recommendation

The staff had reached out to several constituents and a number of respondents stated that it was unclear whether the described cash pooling arrangement was common. There were mixed views regarding the predominant accounting treatment.

The staff analysed that the accounting depended on the individual facts and circumstances of each case and judgement would be required.   The staff also did not have evidence of diversity in practice, particularly when differences in off-setting practice might be attributable to differences in the facts and circumstances.

On that basis the staff recommends that the Committee should not take this issue onto its agenda.

Committee discussion and decision

The Committee members broadly supported the staff recommendation to issue an agenda decision. However, several Committee members struggled with some of the wording in the proposed tentative agenda decision. One member suggested referring to guidance in the Standard rather than judgement. The Senior Technical Manager replied that there were cases where judgement was required. Other members noted that the fact the amounts were unknown did not affect the intention to settle. An entity could have an intention to settle unknown amounts. One Committee member suggested clarifying whether it was expected that the amounts would subsequently change or if it was a mere possibility. It was also proposed to clarify that this was a specific fact pattern and the decision would not apply to other financial instruments (e.g. derivatives).

The IFRS Interpretations Committee has received a request to clarify how to determine hedge effectiveness for hedges of a net investment in a foreign operation (‘net investment hedges’).

The submitter noted that IFRS 9 does not provide specific guidance for net investment hedges. Instead, the Standard states that they should be accounted for similarly to cash flow hedges and, in addition, the net investment hedge guidance in IFRS 9 cross-references to the accounting guidance for cash flow hedges including the ‘lower of’ test to measure effectiveness for hedging instruments.

The submitter finds it unclear whether the ‘lower of’ test also applies to the accounting for net investment hedges.

Staff recommendation

The staff contacted several constituents, of which a majority noted that IFRS 9 hedge accounting rules have not yet been adopted by most entities. Under the current IAS 39 practice, application of the ‘lower of’ test to net investment hedges was the approach most commonly observed. The respondents were not aware of any significant diversity in practice.

In addition, the staff analysed that the term ‘similarly’ in IFRS 9 should be understood to also extend to the application of the requirements of the ‘lower of’ test when accounting for net investment hedges, because the mechanics and underlying rationale of those requirements are closely aligned to the requirements and principles of IAS 21.

Based on the results of the outreach and the staff’s analysis, the staff recommend that the Interpretations Committee should not take this issue onto its agenda.

Committee discussion and decision

There was general support amongst Committee members to follow the staff recommendation as they had also not observed any significant diversity in practice. They confirmed that applying the ‘lower of’ test to net investment hedges was the predominant accounting.

However, some Committee members suggested amendments to the proposed tentative agenda decision. Several members struggled with the reasoning of aligning the hedge accounting requirements for net investment hedges with IAS 21. They argued that IAS 39 and IFRS 9 were the only Standards that dealt with hedge accounting.

The reference to IAS 39 in the proposed tentative agenda decision was challenged by one Committee member as, in his view, the guidance in IFRS 9 was sufficient. However, the other Committee members did not see an issue with this reference when the Chairman called for a formal vote on that reference.

Accounting for combined service concession and lease arrangement

The Interpretations Committee received a request for clarification on the accounting treatment related to arrangements whereby public transport services were provided by an operating company for a public transport authority.  The submitter described different scenarios for effecting the arrangement that could include affiliated entities or a service concession arrangement in which the infrastructure that was used was leased, perhaps with the public transport authority guaranteeing the lease payments.   

The agenda paper described the particular fact-patterns submitted and identified three issues to be analysed: 

(i) whether the arrangement was in scope of IFRIC 12;

(ii) whether the operator was required to recognise lease assets and lease liabilities and

(iii) whether the recognised assets or liabilities should be presented on a gross or net basis and how they should be measured.

Staff recommendation 

The agenda paper discussed in detail the potential views of the staff for each question, before concluding that the Interpretations Committee should not take the issue into its agenda because there was sufficient guidance on the matters submitted.   

The proposed agenda decision was extensive and proposed the following conclusions (which we summarised):

(i) Scope: the assessment requires judgement and entities should consider all facts and circumstances to determine the scope of the transaction.

(ii) Recognition: the accounting for payments made by the operator to the grantor (including payments to a leasing company controlled by the same governmental body that controls the grantor) should be considered as part of the separate project being considered by the Interpretation Committee; and if the operator does not make payments, the operator first needs to assess whether any part of the arrangement is executory, if it is not the recognition of an asset and liability would be based on the nature of the consideration that the operator receives from the grantor.

(iii) Presentation and measurement:  the operator needs to assess whether it is operating as a principal or agent.  If the operator has an obligation to make payments to the leasing company and a right to receive payments from the grantor, the operator would account the asset and liability separately. 

Interpretations Committee discussion

There was general agreement with the staff recommendation for not taking the issue into the agenda. However, there were several concerns expressed by the majority of the Interpretation Committee members regarding the rationale for the recognition analysis (see below). The staff will revise the analysis and bring back a revised agenda decision at a future meeting.

Scope

There was general support for the staff analysis. Particularly, several Interpretation Committee members pointed out that the agenda decision would be an appropriate method to clarify that construction or upgrade services of the infrastructure were not necessary for the arrangement to fall in the scope of IFIC 12 as long as the scope requirements were met. It was also suggested to make the fact patter more generic (for example not focusing on transportation services) and focus on the general principles of IFRIC 12.

Recognition

There were common concerns expressed by the Interpretation Committee members. The concerns were focus on:

(i) the analysis was difficult to follow and it was not clear when the analysis was following case 1 or case 2, it was also not clear whether the analysis was made on the perspective of the grantor or the operator;

(ii) the analysis should focus on the right of use of the assets instead of focusing on whether the arrangement contains executory or non-executory clauses; it was pointed  out that once the arrangement is in scope of IFRIC 12, the grantor controls the asset and accordingly, the grantor has a lease;

(iii) it is necessary to expand the analysis on the situation in which the operator guarantees the payment and requirements for the operator to recognise asset and liabilities in those cases;

(iv) the agenda decision should focus on key principles and help follow the thought process of the staff to reach the conclusion.

Presentation and measurement

The topic was not discussed given the concerns mentioned above.

The purpose of this session was for the staff to update the Interpretations Committee on the current status of issues that are in progress but that were not to be discussed by the Committee at the November 2015 meeting. 

Open issues

The staff paper listed three open issues that are to be presented at a future meeting: IAS 12.19, Recognition through profit or loss of deferred taxes for temporary differences arising from the effect of exchange rate changes on the tax basis of non-current assets; IAS 16-14, Accounting for proceeds and cost of testing PPE - should net proceeds reduce cost of asset?; and IFRS 11-6, Remeasurement of previously held interests - loss of control.

Issues on hold

IAS 28.13, Assessment of significant influence: fund manager acting as an agent and holding own investment in the fund.

New issues

The staff are analysing three matters that are yet to be presented to the Interpretations Committee:  IAS 39.43 , Derecognition of financial liabilities; IFRS 9.4, Modification/exchange of gains/losses on financial liabilities that do not result in derecognition; and IAS 12.21, Expected manner of recovery for measuring deferred taxes on indefinite life intangible assets

The Committee members were provided with an opportunity to ask any questions or provide any comments with respect to the items in the staff paper.

Interpretations Committee discussion

The Committee members had no questions or comments with respect to the items in the staff paper.